How high is too high?
That’s the question that will be confronting retailers around Los Angeles County in the summer after voters on Tuesday approved Measure M, a half-cent sales tax increase for transportation projects.
Combined with other sales tax hikes approved by voters in several cities this week and in recent elections, the measure will push the sales tax to 10.25 percent in July in seven cities: Compton, La Mirada, Long Beach, Lynwood, South Gate, Pico Rivera, and Santa Monica.
The tax rate will be among the highest in the country, matching the rate in Chicago, according to figures from the Tax Foundation, a Washington, D.C., nonprofit.
Another seven county cities will see their sales tax rise to 9.75 percent; the rest of the county’s 88 cities will have a sales tax of 9.25 percent.
With the tax rate entering double digits, the question for retailers is whether customers will take their business elsewhere, either to neighboring counties with lower tax rates or online, where products are often not taxed at all.
Consider Long Beach, where voters in June approved a 1-cent hike in the sales tax to 9.75 percent, starting Jan. 1. Just six months later, thanks to Measure M’s passage, the rate jumps an additional half-cent to 10.25 percent.
These taxes would be even higher if a quarter-cent statewide sales tax approved by voters in 2012 under Proposition 30 weren’t set to expire after Dec. 31.
Meanwhile, in some nearby Orange County cities, the sales tax will fall to 7.75 percent when that Proposition 30 sales tax sunsets. As a result, Long Beach shoppers who drive five miles into Orange County will be able to save $25 on a $1,000 big-screen TV.
“I do believe you will see some retail leakage to our bordering cities with much lower sales tax rates, such as Seal Beach or Cypress,” said Jeremy Harris, government affairs director for the Long Beach Area Chamber of Commerce. “I can see some residents going beyond to places like South Coast Plaza in Costa Mesa for big-ticket items such as home appliances and new high-priced electronics.”
Vehicle purchases, which run into tens of thousands of dollars, cannot be subject to such leakage because the Legislature several years ago voted to base the sales tax on the residence of the buyer, not the location of the dealer.
But this leakage might only occur at the margins, said economist Chris Thornberg, president of Beacon Economics in Los Angeles. Even then, if some retailers see that they really are losing business to nearby cities, they can adapt by lowering their prices slightly.
The real threat is that double-digit sales taxes might hasten the switch to online purchases, especially from sites that do not add in the sales tax. Two years ago, Amazon.com reached an agreement with California to add in the sales tax on all purchases in the state; some other online retailers have followed suit.
“So many people now buy online for the sheer convenience,” Thornberg said. “But if you could save a 10 percent charge for sales taxes, that would only make online purchases even more attractive.”
Thornberg said the bigger issue that retailers should be concerned about is why local governments keep turning to the sales tax to fund increases in the cost of government services. With property taxes put off limits by Proposition 13 and income taxes under the sole jurisdiction of the state, sales taxes are one of the few levers left for local governments.
Making matters worse, over the past decade, he said, government spending in California rose at five times the rate of sales taxes.
“It really doesn’t make sense for local governments to use sales taxes as their main funding source,” he said. “By definition, no matter what they do with regard to sales taxes, the cities are always falling behind, which forces them to go to the sales tax well over and over again.”
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